What is per diem?

Per diem is a fixed, predetermined amount of money that a company pays its employees who are traveling for work. It’s often used as an alternative to expense reports that track actual expenses or in combination with these kinds of expense reports (i.e., using expense reports for itemized lodging costs and per diem rate for meals and incidentals) to reimburse employees.

Federal per diem rates are set each year by the General Services Administration (GSA) for employees who travel within the lower 48 Contiguous United States (CONUS), the Department of Defense for employees traveling to Alaska, Hawaii, Puerto Rico and Guam, and the State Department for employees traveling anywhere outside the U.S. and its territories.

Per diem typically covers the following areas of an employee’s travel expenses:

• Lodging: Overnight stays in hotels, motels, apartments, rental homes, etc.
• Meals: Breakfast, lunch and dinner
• Incidentals: Room service, dry cleaning, tips for food servers and luggage carriers, etc.

Note that per diems generally don’t cover transportation costs to and from each location (e.g., flights, rental cars). As an employer you can choose to make these arrangements on behalf of your employees and pay for everything upfront, or have your employees book transportation and reimburse them later. Consider including this information in a formal travel policy.

Benefits of using per diem rates for business travel

Calculating travel costs using per diem rates — instead of using alternate methods like itemized expense reports — has the potential to save you both time and money. Instead of having to review dozens of receipts when employees return from their trips (or having to estimate how much money to give them before their trip), per diem is a simple flat rate.

Per diem can also encourage employees to be more frugal, since they have a limited amount of money to spend while they’re on their trip. If you provided employees with a company credit card, for example, spending could be harder to track and expenses could add up quickly.

Per diem rates

Here’s a look at different per diem rates that may apply to your business.

Standard rates by state

Each state’s per diem rates vary based on cost of living, so use the GSA website to identify the rates for your state:

1. Go to www.gsa.gov/travel/plan-book/per-diem-rates
2. Enter the correct fiscal year (each fiscal year comes into effect on October 1).
3. Select the state your employee is traveling to.
4. Enter the zip code of the employee’s destination.
5. Click “Find Rates” or scroll down to the U.S. map and click the destination state.
6. Review the standard rate issued under “Lodging by month (excluding taxes)” and the “Meals & Incidentals (M&IE) Breakdown.” According to the IRS, there are generally two methods for per diem rates that employers may use: a rate that combines lodging and meal costs, and a rate for meal costs alone.

If your employees will be traveling to Alaska, Hawaii, Puerto Rico or Guam, go to the Department of Defense’s rates website instead. If employees will be traveling to a foreign destination, check out the State Department’s per diem rates.

The standard per diem rate

For any location that doesn’t have a specified rate on the GSA’s per diem rate website, a standard per diem rate of $151 ($55 for M&IE and $96 for lodging) applies. This standard per diem rate covers most of the CONUS (~2,600 counties).

Calculating total per diem by trip

The amount of per diem to give your employee depends on the length, location and even time of year of their trip. For example, if an employee travels to a state where per diem is $139 per day, they will receive $130 for each day they stay there on business. For a four-day business trip, that would equal $520 in total.

The GSA website has tools to help you evaluate potential costs depending on those factors.

1. Go to the GSA’s Per Diem tool.
2. Enter details about the destination location.
3. Click “Next.”
4. Click “Calculate Per Diem Allowances for a Trip.”
5. Enter the start and end date for your employee’s trip.
6. Click “Next.”
7. If multiple rates are available, select the destination county.
8. Click “Next.”
9. Use the estimated daily rate and total per diem along with information in the “Breakdown” column to set your employee’s travel per diem.

How to pay per diem for traveling employees

Should you pay per diem before or after travel? It’s generally up to you to decide how to pay per diem, but there are a few different options:

• Full upfront payment: You can choose to give employees the full amount of per diem through a company credit card (with a specific limit) or cash before they leave for their trip. Anything beyond that fixed payment can come from their own personal expenses.
• Partial upfront payment: Partial coverage refers to covering one or two expenses like meals and incidentals while employees pay for lodging. This is a less common way to pay per diem, since most companies cover all travel expenses.
• Reimbursing later: You can also choose to reimburse your employees after they return from their trip.

Is per diem taxable? How to find out

Since per diems are not considered wages by the IRS, they are generally non-taxable for employees and can either be partially or fully deductible for employers — as long as they meet certain conditions. The following list details how to determine if per diems are taxable for employees, according to the IRS:

If your employee’s per diem exceeds the federal limit: If the total amount of per diem you provided to an employee exceeds the federal per diem rate limit, then the remaining amount will typically be taxed as income for employees.

If an employee doesn’t file an expense report: If employees don’t file an expense report for their per diem, then there isn’t a record that indicates whether you abided by the federal limit. Because of this, employees may be taxed for per diems just in case you did exceed the limit. Employees must generally file expense reports that include the following information: business purpose, date, location and lodging receipts (if applicable). Consider including a detailed process for filing per diem expense reports in your company handbook so employees know exactly what to do.

If an employer doesn’t include specific information on the expense report: If you file an expense report but don’t include any information that indicates a per diem, then employees may have to pay taxes for it because tax officials won’t be able to distinguish which expense listed is the per diem — and they won’t be able to confirm if you exceeded the federal limit. To prevent this, document the reasoning for each expense including the date, time, place and employee(s) who used the per diem.

If an employer gives an employee a flat amount of money: If you give your employee a set amount of cash to spend on food and lodging, then this typically doesn’t require an expense report. Therefore, because no expense report is necessary, employees may be taxed for the potential of exceeding the federal limit.

Consider speaking with or hiring an accountant if you need help with accurate per diem expense reporting.